Skip to main content

Why Citibank Might Not Be Around ... Soon


Why pick on Citibank? Didn't they agree to break up the company already? Well, one can argue that the biggest toxic assets reside in Citigroup, Lehman Brothers and Merrill Lynch. We all know Lehman was hung out to dry. Merrill's woes are now part of Bank of America's problems. BoA may or may not be able to digest Merrill's positions. Both Citi and BoA have been given tons of money by the US government. Will it be sufficient? In the past 12 months, taxpayers, sovereign wealth funds and private investors have sunk $1 trillion into failing U.S. and British financial institutions, while central banks have slashed their cost of funds to nothing and their collateral standards even lower.

It looks likely that the hole is simply too big to fill even by governments. Bank losses from the write-offs of bad loans and busted derivatives tally up to $1.5 trillion so far. In addition, $5 trillion to $10 trillion worth of off-balance-sheet businesses such as structured investment vehicles - leveraged lending vehicles used by big banks are being forced back to banks' balance sheets by regulators. Rules require banks to keep a base of real shareholder capital amounting to 10% of those funds. So banks need to find up to $1 trillion within the next year to meet that objective.That is in addition to all that has been injected into banks so far.

Add the $1.5 trillion in losses to $1 trillion in needed new reserves, and you can see that banks need as much as $2.5 trillion in new capital to remain solvent under current rules. Consider that the entire world banking system had only $2 trillion in shareholder capital in 2007, before everything blew up. Therefore, the entire system is simply insolvent, as liabilities are greater than assets. Governments aren't forcing banks to admit this, but investors are, and that is why big banks' shares are only a fraction of their value this year compared to their highs in 2008.

Governments, meanwhile, are trying desperately to help banks plug the gap, but they're coming up short. When you add the $500 billion from sovereign wealth funds to the $500 billion from the first tranche of the Troubled Assets Relief Program, it's only $1 trillion. That's already been provided. So that leaves a gap of $500 billion to $1.5 trillion. That's why Trichet said that banks don't need to keep 10% capital reserves.

Is this all priced in? Well, insolvent banks is why credit is not flowing, besides being a confidence issue as well. Even BoA and JP Morgan Chase are continuing to drop despite being on firmer ground. Investors have already factored in the likely outcomes. Nationalise (take over) Citibank, and force a merger with either BoA or JP Morgan Chase. Nationalisation means that banks would have to issue equity to the government, a process that wiped out current shareholders. Yes, that would mean most bank stocks would go to zero. If banks are insolvent, the most attractive asset they have is the brand. To leave them hanging around means they won't be able to do any lending, just like zombie firms. The new administration will have to bite the bullet on this. When this happen, it will be viewed as a positive, not a negative, as we will be on our way to cleaning up the zombies.

To be clear, when I say that Citibank and/or BoA might not be around soon, it basically means that they will be absorbed into another entity, not that they will disappear or that their jobs will disappear. The best that the big banks can hope for is that the 'bad bank' idea takes root - but they will have to ask for another $1.5 trillion to fund the 'bad bank', if that takes flight, then Citigroup, BoA and the rest can sell the toxic assets to the 'bad bank' ... then they can still survive, if the 'bad bank' idea fails... its nationalisation , baby...

JP Morgan (JPM), Citi (C), Bank of America (BAC), Morgan Stanley (MS), Goldman (GS) and UBS. Analyst ratings on fellow banks as at 28 January 2009. Knowing analysts' ratings, a SELL is a big sell, a HOLD means its a SELL as well.

This will not just be in the US but will affect a few of the top banks in Europe as well. The idea of a bad bank is basically an alarm bell to all that TARP as it is will be insufficient to bailout the big banks. We now cringe at the size of the TARP and Obama's stimulus package, well how about another $1.5 trillion for the bad bank - while that is good for the markets, it should be the death knell for USD.


p/s photos: Chen Run Xi


Comments

rask3 said…
Hi,

Looks like USD is not backed by anything except loads of bullshit. Why don't the Chinese and Japanese sit out a few T-Bill auctions, and teach dem Mat Sallehs a lesson in macro economics?

Okay, bank brand names are worth something. How about the Chinese, Japanese, Indians, Mexicans et al picking up a few names on the cheap as old Warren is wont to? Sounds better than picking up worthless USD, does'nt it?


Rask
see said…
The mat sallehs even have the nerve to blame the crisis on the chinese for lending them the money & this suggested in academic tones by Phd's....bwahahaha!

So Dali, you still think this crisis over soon since banks are basically insolvent?

Popular posts from this blog

My Master, A National Treasure

REPOST:  Its been more than two years since I posted on my sifu. This is probably the most significant posting I had done thus far that does not involve business or politics. My circle of close friends and business colleagues have benefited significantly from his treatment.


My Master, Dr. Law Chin Han (from my iPhone)

Where shall I start? OK, just based on real life experiences of those who are close to me. The entire Tong family (Bukit Kiara Properties) absolutely swear that he is the master of masters when it comes to acupuncture (and dentistry as well). To me, you can probably find many great dentists, but to find a real Master in acupuncture, thats a whole different ballgame.


I am not big aficionado of Chinese medicine or acupuncture initially. I guess you have to go through the whole shebang to appreciate the real life changing effects from a master.


My business partner and very close friend went to him after 15 years of persistent gout problem, he will get his heavy attacks at least…

PUC - An Assessment

PUC has tried to reinvent itself following the untimely passing of its founder last year. His younger brother, who was highly successful in his own right, was running Pictureworks in a number of countries in Asia.

The Shares Price Rise & Possible Catalysts

Share price has broken its all time high comfortably. The rise has been steady and not at all volatile, accompanied by steady volume, which would indicate longer term investors and some funds already accumulating nd not selling back to the market.


Potential Catalyst #1

The just launched Presto app. Tried it and went to the briefing. Its a game changer for PUC for sure. They have already indicated that the e-wallet will be launched only in 1Q2018. Now what is Presto, why Presto. Its very much like Lazada or eBay or Alibaba. Lazada is a platform for retailers to sell, full stop. eBay is more for the personal one man operations. Alibaba is more for wholesalers and distributors.

Presto links retailers/f&b/services originators with en…

How Long Will The Bull Lasts For Malaysia

Are we in a bull run? Of course we are. Not to labour the point but I highlighted the start of the bull run back in January this year... and got a lot of naysayers but never mind:






























p/s: needless to say, this is Jing Tian ... beautiful face and a certain kind of freshness in her looks and acting career thus far



http://malaysiafinance.blogspot.my/2016/12/bank-negara-may-have-switched-on-bull.html


I would like to extend my prediction that the bull run for Bursa stocks should continue to run well till the end of the year. What we are seeing for the past 3 weeks was a general lull where volume suddenly shrunk but the general trend is still intact. My reasons for saying so:

a) the overall equity markets globally will be supported by a benign recovery complemented by a timid approach to raising rates by most central banks

b) thanks to a drastic bear run for most commodities, and to a lesser extent some oil & gas players, the undertone for "cost of materials" have been weak and has pr…